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Speculators have run amok with a few stocks. And so?

August 28, 2009 | 7:00
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Speculators are having a wild time with a handful of stocks this month, and they’re driving the blogosphere into its own kind of speculative frenzy -- speculating on what level of ruin this will bring.

By now, anyone paying even marginal attention to the market action of the last few weeks knows about the huge percentage gains in shares of federal bailout beneficiaries American International Group, Freddie Mac and Fannie Mae, all three of which have surged more than 230% since July 31.

Citigroup, up 59% this month, looks like a piker compared with those three, though not compared with the 4.4% rise in the Standard & Poor’s 500 index.

This week, speculators have piled into another name: telecom services company Vonage Holdings. The shares soared from 46 cents last Friday to $2.17 by Wednesday, before pulling back to $1.99 on Thursday.

The manic price moves in these few stocks have been accompanied by off-the-charts trading volume -- to the point where they’ve been accounting for more than a third of all New York Stock Exchange volume in recent days.

Two distinct groups are getting the credit, or blame, for this apparent nuttiness: a swelling pool of amateur day traders, and the high-frequency trading firms, or HFTs, whose incredibly fast computers feed on, and profit from, these kinds of manias.

Not surprisingly, the frantic activity has triggered warnings from market bloggers like Karl Denninger, a professional trader who wrote on Seeking Alpha this week:

If there was ever an argument to be made for the NYSE having turned into a gigantic "hot potato" parlor game, this is it -- in your face in an impossible-to-explain-away fashion.

The ordinary investor who has a brain sees it as an amusing sideshow, but the unfortunate fool who gets sucked into the maelstrom is going to get destroyed when the computers move on to some other issue and the price collapses as there is no authentic bid out there for any of this crap.

RobotTrader at ZeroHedge blog humanizes some of Denninger's unfortunate fools in an entertaining recap of the scene at a Starbucks store:

Two days in a row . . .I found young, slacker, unemployeds huddled around a table with their laptops daytrading stocks.

Today, I saw two surfer/skateboard slackers, complete with flatbill caps, sunglasses worn backwards, "Affliction" t-shirts, etc. One guy was clearly the fast talker, teaching his friend how to daytrade using "resistance" and "support" on a 5-minute chart. Wanna bet what stocks he was talking about? Yep. AIG and Vonage. It was all I could do to keep from bursting out laughing.

For the vast majority of investors who aren't in this particular game, the question is what, if anything, the casino action implies about prospects for the rest of the market.

Let’s say, for argument’s sake, that these stocks are mini-bubbles that will soon burst. Would that have to drag down the broader market? Why would it -- if the market as a whole isn’t taking its cue from these few names as they go vertical?

Also note that, because AIG, Citi, Fannie and Freddie already are wards of the federal government, no emergency would be triggered if their shares plunged again. They've already had their emergencies.

The summer rally in most stocks (the S&P 500 is up 17.3% since July 10) has had a fundamental underpinning: data that have, pretty consistently, pointed to a bottoming of the recession. That has raised hopes that some kind of economic recovery is on the horizon.

So when Wall Street gets back to work after Labor Day, it seems reasonable to assume that most investors will be far more likely to care about the latest economic numbers -- and what companies are saying about third-quarter sales -- than whether August's small band of rocket stocks come crashing back to Earth.